Method and system of determining and applying insurance profit scores

ABSTRACT

Preferred embodiments of the invention include a new and innovative method and system of determining a profit score for an individual policy, which score may be used to evaluate the desirability of offering or renewing individual insurance policies. The present invention also may be applied to determine the profitability of aggregate books of business, which may be offered by individual insurance agents or agencies, whether captive or independent.

FIELD OF THE INVENTION

The invention is generally related to a method and system of determiningand applying profit scores calculated from insurance data, such asautomobile insurance data.

BACKGROUND OF THE INVENTION

Insurance companies transfer a risk of loss in exchange for payment of apremium by the insured. In order to determine the amount of the premium,insurance companies attempt to determine the likelihood that a loss willoccur. Ideally, insurance premiums should correlate with the frequencyand severity of the potential exposure to risk. In the case ofautomobile insurance, for example, an insured's driving experience andactual driving record are factors that correlate with likelihood ofloss.

In furtherance of anti-discrimination policies, many governmentsthroughout the world impose restrictions on the types of factors thatinsurance companies may use to rate insurance. As one example, the Stateof California defines three mandatory ratings factors and severaloptional ratings factors to be used in establishing automobile insurancepremiums. Only the approved list of factors may be used in determiningpremiums. These restrictions can result in insurance companies chargingpremiums that do not correlate as accurately as possible with potentialrisk of loss. In specific situations, insurance companies mayundercharge certain potential insureds in view of the risk of loss.

Insurance companies define their profits as earned premiums plusinvestment income less incurred loss and underwriting expenses. Aninsurance company that charges less of a premium than is warranted willrecognize less profit. Conversely, an insurance company that charges ahigher premium will recognize more profit. In a competitive market,price competition among insurers establishes an upper limit on theamount of premiums. An insurer can charge only the amount that aninsured is willing to pay. Downward price pressure due to competition,particularly when coupled with restrictions on the ability to moreaccurately rate insurance risks, results in insurance companies chargingsuboptimal premiums and, therefore, obtaining suboptimal profits.

The prior art includes a description of determining types ofprofitability information for certain types of new or existing insurancepolicies. For example, U.S. Patent Application No. 2002/0161609 A1,filed by Zizzamia et al. and published on Oct. 31, 2002, describes aprocess of creating a predictive model to calculate a quantitative scorefor commercial insurance policies. The predictive model, in turn,requires “external data sources,” such as zip code level census data,county level data such as weather, and business owner household leveldemographics to compute profitability information (see paragraphs 13,35-41). In the absence of such external data, the methods of Zizzamiacould not determine expected profitability. In addition, the Zizzamiaapplication refers to a “score,” calculated from external data sources,but it does not describe the score as being normalized across differentdiscrete books of business. Rather, the Zizzamia application uses thecalculated score to sort a particular policy into one of ten deciles,for which a particular loss ratio has been determined (see paragraphs93-94). Zizzamia does not provide any description as to howprofitability information may be calculated or used outside of thecommercial insurance market.

BRIEF SUMMARY OF THE INVENTION

The invention comprises, among other things, a new and innovative methodand system of determining a profit score for an individual policy, whichscore may be used to evaluate the desirability of offering or renewingindividual insurance policies. The present invention also may be appliedto determine the profitability of aggregate books of business, which maybe offered by individual insurance agents or agencies, whether captiveor independent.

BRIEF DESCRIPTION OF THE SEVERAL VIEWS OF THE DRAWING(S)

FIG. 1 schematically illustrates an exemplary environment in which theinvention may be used;

FIG. 2 is a flow diagram illustrating an aspect of the inventiondirected to a determination of a profit score and use of the profitscore in connection with a single insurance request;

FIG. 3 is a flow diagram illustrating an aspect of the inventiondirected to a determination of profit scores and use of aggregatedprofit score statistics for a book of business;

FIG. 4 is a flow diagram generally indicating the steps associated withcreation of a profit score formula and use of that formula to determinea profit score for an individual risk; and

FIG. 5 is a sample screen shot of a graphical user interface used fordetermining a profit score for particular risk.

DETAILED DESCRIPTION OF THE INVENTION

As illustrated in FIG. 1, an insurance company branch 1 has employees orbrokers, indicated generally by reference numeral 2, that respond torequests for insurance and further process insurance related data, suchas data related to a claim. Employees of insurance company branch 1process insurance claims and further make decisions as to whether tooffer or renew insurance policies. In addition, an insurance company mayuse a direct acquisition process that does not utilize employees, agentsor brokers. The systems and processes described in this specificationapply without limitation to all avenues of insurance sales andmarketing.

The electronic data systems of branch office 1 typically connect withthe insurance company headquarters 5 via a computer network, such as theInternet 4. An insurance company headquarters, such as headquarters 5,typically maintains its own separate electronic data processingequipment and software, such as server 6, application 7 and database 8.The branch office transmits insurance information through email, filetransfer or otherwise, as requested by the headquarters 5 of theinsurance company.

The insurance company 5 may further delegate some or all of itsinsurance business to an independent agency, such as agency 9. As withbranch office 1, an independent agency 9, will typically have employees,indicated by reference numeral 10, that use electronic systems, such ascomputer 11. In this arrangement, the independent agency, like thebranch office, will interact with electronic systems of the insurancecompany headquarters 5.

A request for insurance from the insurance company 5 will be processedby a branch office 1, an independent agency 9, or by the insurancecompany 5 itself. In order to provide a quotation for an insurancepremium, the insurance company (either directly or indirectly) willinquire as to risk factors and the nature of insurance sought in orderto underwrite the risk as accurately as possible. For automobileinsurance, a potential insured may be required to provide to theinsurance company information regarding the vehicle to be insured, suchas make, model and year. The insurance company also typically willrequire a potential insured to provide personal information, such asgender, age, location of garaging of the vehicle, other drivers on thepolicy, marital status, driving experience, driving record, andanticipated mileage during the insurance period.

In accordance with any applicable ratings regulations, the insurancecompany or its brokers or agents will use the information supplied bythe insured or potential insured to determine an applicable premium. Inthose jurisdictions that restrict or prohibit use of certain informationduring the ratings process, the insurance premium may not accuratelyreflect the likelihood of loss for a particular policy. In a typicalprior art insurance process, the profitability of a particular insurancepolicy is not a factor that an insurance company will use to determinewhether to offer or renew a specific insurance policy at a specificrate.

FIG. 2 illustrates an aspect of the invention in which a profitabilityscore is used to determine whether to issue or renew a specificinsurance policy. At step 201, the insurance company or its broker oragent (hereinafter generically referenced as “the insurance company”)receives a request for insurance. The insurance request may becategorized as a new request or a renewal of an existing insurancepolicy. If a request for insurance is a renewal, the insurance companymay be obligated to renew the insurance as a condition of contract or byaction of law. If a renewal policy is not issued as a compulsory matter,an insurance company may consider the renewal policy in a manner similarto a new request, at least for purposes of rating the risk. Theseconsiderations are illustrated in decision blocks 202 and 203 of FIG. 2.As indicated by step 204, if a policy must be renewed according to acompulsory process, whether by contract or law, the insurance companywill do so in accordance with the existing policy. Alternatively, therenewal or new insurance request will be rated.

The underwriting steps associated with generating a premium for a givenrisk are well understood to persons of skill in the art. At step 205,the policy is rated in a customary manner, which, in the case ofautomobile insurance, may involve factors such as the vehicle anddriving history of the potential insured. At step 206, however, theprocess diverges from the prior art. FIG. 2 includes step 206 ofdetermining a profit score.

A profit score is a scaled and unitless value. In a preferredembodiment, it may be calculated according to the process of FIG. 4 andas described below. A profit score relates an expected profit margin (oran expected range of profit margins) to a given risk. The expectedprofit margin, in turn, is calculated from historical data. In apreferred embodiment of the invention, a profit score ranges from below0 to above 1000 with the majority of profit scores for a given riskexpected to fall within the range of 0 to 1000.

TABLE 1 Profit Score Profit Margin Above 1000 >=37%  900-1000 28%~37%800-900 19%~28% 700-800 10%~19% 600-700  1%~10% 500-600 −8%~1%  400-500−17%~−8%  300-400 −26%~−17% 200-300 −35%~−26% 100-200 −45%~−35%  0-100−54%~−45% Below 0 <=−54%

Table 1 illustrates an exemplary relationship between profit scores andprofit margins for a given risk. A profit score that is above the linein Table 1 indicates positive profitability. For example, a profit scorein the range of 600 to 700 indicates an expected positive profit marginin the range of 1% to 10%. Conversely, a profit score that falls belowthe line in Table 1 indicates negative profitability. A profit scorewithin the range of 500 to 600 would indicate an expected loss rangingfrom negative 1% to negative 8%. Profit scores according to theinvention efficiently allow an insurance company to determine theexpected profitability of insuring a particular risk.

As illustrated in the flow diagram of FIG. 2, the profit score isdetermined at step 206 after the policy has been rated, at step 205. Thesequence of determining the profit score, however, is not consequential.The rating process, which should be performed according to soundactuarial and underwriting methodologies that comply with applicablerules and regulations, is necessary before a premium may be determined.However, it is not necessary to rate a particular risk prior todetermining a profit score. Determination of a profit score likewise isnot required for calculation of an insurance premium. At decision block207, the profit score is compared against a threshold to determinewhether the expected profit is acceptable for an individual risk. Ifnot, the insurance application may be denied and referred to anunderwriter for review, as indicated at step 208. Conversely, if therisk can be rated, and if the profit score is acceptable, an offer ofinsurance will be extended, as indicated at step 209.

The decision as to whether a profit score will be deemed acceptable, asat decision block 207, includes variables such as the jurisdiction andparticular insurance company's appetite for profit. In certain markets,an insurance company may decide that a 10% profit margin is inadequate.In other markets, this may be a highly desirable profit margin.Therefore, the step of determining whether a given profit score isacceptable depends on appropriately setting the threshold value againstwhich the profit score is evaluated.

FIG. 3 illustrates a further aspect of the invention. An insurancecompany may seek to evaluate the profitability of a branch office, suchas office 1 (FIG. 1), or an independent agency, such as agency 9 (FIG.1), in connection with a specific book of business. To accomplish thisresult, in accordance with the invention, the insurance company 5 mayaggregate insurance data, step 301, which data may be contained on thecompany's electronic systems 6-8 (FIG. 1) or acquired on an as-neededbasis from the branch offices and agencies. After the relevant data hasbeen collected, the insurance company's electronic systems calculate aprofit score for each policy within the relevant book of business, step302.

The insurance company's electronic systems further calculate descriptivestatistics for the relevant book of business, step 303. Such statisticsmay include, for example, the median, mean, mode, standard deviation,and/or range and distribution of profit scores for a particular book ofbusiness. The insurance company thereafter compares the calculatedstatistics with one or more thresholds to determine whether a book ofbusiness has met expectations, decision block 304. Depending on theoutcome of this comparison, an insurance company may decide that aparticular book of business should be terminated, step 305, or thatspecific remediation steps are necessary, step 306. An example ofsuitable remediation may include an instruction from the insurancecompany to the branch office or agency not to issue or renew certainpolicies without the approval of the insurance company. To the extentthat an insurance company determines that descriptive statisticspertaining to aggregated profit scores are acceptable, the company maychoose to take no further action. This step is indicated in FIG. 3 by areturn from decision block 304 to the step of aggregating insurancedata, step 301, at an appropriate time.

FIG. 4 illustrates the specific steps by which a profit score may bedetermined. At steps 401 and 402, the insurance company determines aprofitability profile and the variables used in determiningprofitability. This step is preferably conducted by regression analysisor other statistical processing technique as applied to historical dataassociated with past premiums and loss experience. Based on thesetechniques, it is possible to derive a standardized profitabilityequation. In a preferred embodiment of the invention, the equation mayassume the following general form:

${{profit}\mspace{14mu} {score}} = {K_{1} - {K_{2}\left( {{K_{3}{\prod\limits_{i = m}^{n}\; x_{i}}} + K_{4}} \right)}}$

In this equation, the profit score includes several offset constants,indicated by K₁ through K₄, which standardize the profitability scoreacross different countries and different books of business. Themathematical products of individual variables, indicated by x_(i), arescaled by a constant, K₃, added to another constant, K₄, and the sum ofthese is scaled by constant K₂, which product is then subtracted from afirst constant, K₁.

The step of determining the offset constants, step 404, involvesnormalizing historical data across all books of business to findsuitable constants. Through the use of appropriate constants, theequation, as applied to individual books of business in variousjurisdictions, results in a single profit score scale that may be usedto compare the profitability of any individual risk. After the formulais derived, it is possible to apply the formula to a particular risk,step 405. The factors and constants may change based on differentvariable combinations to identify the profitable risks and unprofitablerisks. Each country or jurisdiction may have a different set ofvariables and factors.

A specific example of calculating a profit score according to thepresent invention follows. In the hypothetical example of Table 2, amale seeks to renew an existing policy with a 6% deductible. The valuesin the table corresponding to the “Factor” column correspond to thevariables, x_(i), in the equation identified above.

TABLE 2 Variable Profile Factor Gender Male 1.000 New/Renewal Renewal0.915 Deductible 6% 0.952 Vehicle Type Auto 1.000 Vehicle OD Group B1.112 Vehicle Model Year 1996 1.605 Engine Size <=3,000 CC 0.875 Originof Vehicle Imported 1.024 Transmission Automatic 1.000 Number of Doors 41.000 Territory 3 1.000

In this example, and based on an appropriate statistical analysis,K₁=1690, K₂=1100, K₃=0.52, and K₄=0.183. A profit score computed forthis policy would thus be equal to1690−1100×(0.52×1.000×0.915×0.952×1.000×1.112×1.605×0.875×1.024×1.000×1.000×1.000+0.183),which is 692. According to Table 1, therefore, this risk would fall inthe 1 to 10% profit margin.

FIG. 5 illustrates a graphic user interface 500 in which appropriatevariables may be selected for determining a profit score in a particularjurisdiction. The language of the interface may be suitably modified, asindicated by drop down box 506. In interface 500, the profit scoreequation has been determined and is implemented according to thevariables selected or otherwise input through the interface. Examplevariables used in the profitability equation may include contractinformation 502, insured information 503, vehicle information 504, useinformation 505, discount information 507, coverage information 508, andrider or endorsement information 509. Based on the information includedin the insurance companies database, and the profitability formula asdescribed above, the interface is able to return a specific profit score501 for a specific risk.

A novel and innovative underwriting methodology and insurance producthas been described. The methods and systems of the present inventionprovide approaches to determining a profit score for a given risk.Although the foregoing embodiments of the invention have been describedto assist a person of skill in the art, the invention is not limited tothe provided details.

The use of the terms “a” and “an” and “the” and similar referents in thecontext of describing the invention (especially in the context of thefollowing claims) are to be construed to cover both the singular and theplural, unless otherwise indicated herein or clearly contradicted bycontext. The terms “comprising,” “having,” “including,” and “containing”are to be construed as open-ended terms (i.e., meaning “including, butnot limited to,”) unless otherwise noted. Recitation of ranges of valuesherein are merely intended to serve as a shorthand method of referringindividually to each separate value falling within the range, unlessotherwise indicated herein, and each separate value is incorporated intothe specification as if it were individually recited herein. All methodsdescribed herein can be performed in any suitable order unless otherwiseindicated herein or otherwise clearly contradicted by context. The useof any and all examples, or exemplary language (e.g., “such as”)provided herein, is intended merely to better illuminate the inventionand does not pose a limitation on the scope of the invention unlessotherwise claimed. No language in the specification should be construedas indicating any non-claimed element as essential to the practice ofthe invention.

Preferred embodiments of this invention are described herein, includingthe best mode known to the inventors for carrying out the invention.Variations of those preferred embodiments may become apparent to thoseof ordinary skill in the art upon reading the foregoing description. Theinventors expect skilled artisans to employ such variations asappropriate, and the inventors intend for the invention to be practicedotherwise than as specifically described herein. Accordingly, thisinvention includes all modifications and equivalents of the subjectmatter recited in the claims appended hereto as permitted by applicablelaw. Moreover, any combination of the above-described elements in allpossible variations thereof is encompassed by the invention unlessotherwise indicated herein or otherwise clearly contradicted by context.

1. A method for offering an insurance policy comprising: electronicallyobtaining information provided by a potential insured, which informationis associated with a risk of loss for an automobile insurance policy;underwriting the insurance policy in order to determine a premium;calculating with a computer an expected profitability scorerepresentative of an expected profit margin associated with the premium;and offering the insurance policy in exchange for payment of the premiumif the expected profitability score exceeds a predetermined threshold.2. The method of claim 1 wherein the expected profitability score is ascaled and normalized value.
 3. The method of claim 1 wherein theexpected profitability score is calculated exclusively from variableinformation provided by the potential insured.
 4. The method of claim 1wherein the expected profitability score is calculated in part based oninformation other than the information used to determine the premium.5-10. (canceled)